Solvency II: Completion of legislative process

Solvency II: Completion of legislative process

While Solvency II went live at the start of the year, there were key elements of the regime for which the ‘no objection’ period only ended this year. These have now all cleared their final legislative hurdle and are discussed below.

Director and Insurance regulatory lead, EMEA

KPMG in the UK


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Amendments to the Commission Delegated Regulations

These were published in the Official Journal on 1 April as the Commission Delegated Regulation (EU) 2016/467 and entered into force on 2 April.

The main aspect relates to the introduction of a new asset class of “Qualifying infrastructure investments”, intended to encourage insurers to invest a greater proportion of their investments into this asset class. This was a key objective under the European Commission’s Capital Markets Union plans.

The solvency capital requirement (SCR) charges under the standard formula which apply to qualifying infrastructure investments from 2 April are significantly reduced, as follows:

  • Infrastructure equity investments – 30 percent plus 77 percent of the systemic adjustment
  • Infrastructure bond investments – for investments that have been assigned a credit quality step between 0 and 3 by a nominated External Credit Assessment Institution (ECAI), the spread risk charges are 30 percent lower than those applying to other bonds of the same credit quality and term. Unrated items and those with an ECAI rating below 3 are subject to the quality step 3 charges, a reduction of up to 40 percent.

Other important changes relate to:

  • European Long-Term Investment Funds (ELTIF) and equities traded on multilateral trading facilities (MTFs) will now bear the same SCR charges as equities traded on regulated markets
  • Unlisted equities will now be covered by the transitional measure that permits the phasing-in of the SCR charge over seven years
  • Clarification regarding the application of the equity investments transitional measure to collective investment schemes where the look-through approach is not possible
  • Availability of group own funds assessment requirements extended to also cover non-EEA (re)insurance undertakings
  • Corrections to the undertaking specific parameters reserving methodology
  • Extension of the group Day 1 reporting deadline to 26 weeks.

Japan and Bermuda equivalence

On 4 March, the Commission Delegated Decisions for both countries were published in the Official Journal, confirming their equivalence status. These became effective on 24 March.

For Bermuda, with the exception of captives and special purpose insurers, full equivalence has been confirmed in respect of all three areas (reinsurance, solo prudential regimes for the purposes of Article 227 and group supervision). The Decision effectively relates to classes 4, 3B and 3A (Property & Casualty insurers) and E, D and C (life insurers).

For Japan, temporary equivalence applies in respect of reinsurance until 31 December 2020 with a potential one year extension and provisional equivalence applies in respect of its solo prudential regime until 31 December 2025, which is renewable for further periods of 10 years.

Implications for (re)insurers

There is no retrospective application stated in any of these papers. Accordingly, insurance companies/groups will not be able to take these amendments into account in their Solvency II Day 1 reporting. In particular, this means that any "other methods" relating to the group supervision of Bermuda headquartered groups will need to be complied with in relation to this initial reporting requirement. Those entities with December year-ends will also not be able to reflect the Delegated Regulation amendments in their quarter 1 reporting.

In relation to the infrastructure changes, whilst the SCR reduction is significant for standard formula firms, it remains unclear whether this will be sufficient to encourage insurers to move into the asset class. It is also unclear how many investments will meet the “qualifying” status. Please see here for our previous article that explains this aspect further.

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